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August 20, 2013

Marijuana Stock Scams on the Rise

Scammers are capitalizing on popularity of cannabis, FINRA warns

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The increasing acceptance of marijuana for medicinal and recreational purposes is sparking a rise in cannabis-related stock scams, according to the Financial Industry Regulatory Authority.

In an investor alert titled Marijuana Stock Scams, released Tuesday, FINRA warns investors that scammers are capitalizing on the popularity of marijuana now that 19 states and the District of Columbia allow it to be used for medicinal purposes and two states—Colorado and Washington—have legalized it for recreational use.

The con artists behind marijuana stock scams, the alert warns, try to entice investors with optimistic and potentially false and misleading information that in turn creates unwarranted demand for shares of small, thinly traded companies that often have little or no history of financial success. The scammers behind these “pump and dump” scams can then sell off their shares, leaving investors with worthless stock.

Like many investment scams, pitches for marijuana stocks may arrive in a variety of ways--from faxes to email or text message invitations, to webinars, infomercials, tweets or blog posts.

“Investors considering investing in a heavily touted, thinly traded company should question why a total stranger would tell them about a really great investment opportunity,” said Gerri Walsh, FINRA’s senior vice president for Investor Education, in a statement. “In reality, there is likely no true opportunity.”

Investors, Walsh said, should always find out whether the promoter is licensed using FINRA BrokerCheck, and check out the investment using the Securities and Exchange Commission’s EDGAR database of company filings.

The alert tells investors to search the names of key corporate officials and major stakeholders in the purported company, as well as the company itself. “Proceed with caution if you turn up recent indictments or convictions, investigative articles, corporate name changes or any other information that raises red flags,” the alert states.

For example, the alert says that the CEO of one thinly traded, yet heavily touted, company that purports to be in the medical marijuana business spent nine years in prison for operating one of the largest drug smuggling operations in U.S. history. The former CEO of a similar company was recently indicted for his role in a multimillion-dollar mortgage-based Ponzi scheme.

Another company also highlighted in the alert was touted on the Internet through the use of sponsored links, investment profiles and spam email, including one promotional piece claiming the stock “could double its price SOON.” Yet the company’s balance sheet showed only losses, and the company stated elsewhere that it was only beginning to formulate a business plan.